Loan to cost (LTC) is a term you’ll often see used in the world of real estate investing. But what is the loan to cost meaning? In short, loan to cost refers to the amount of financing that a borrower can receive from a lender, as a percentage of the total project costs. This article will explore the loan to cost meaning in more depth, including discussing topics like Loan to Cost vs Loan to Value and the differences between LTV and LTC. You’ll also learn about why LTV is important for fix and flips.
Loan to Cost Meaning – What Does LTC Mean?
Loan to cost (LTC) is a term often used in the world of real estate investing. It refers to the amount of financing that a borrower can receive from a lender, as a percentage of the total costs. The loan to cost ratio is one way to measure the riskiness of a real estate investment project.
The higher the LTC, the higher the amount of debt financing relative to the total cost of the project. This can make a project more risky, as there is more debt that needs to be repaid.
Lower LTC are often seen as being safer, as there is less debt financing relative to the total cost of the project. This means that there is more room for error or unexpected costs.
An Example of Loan to Cost
For example, let’s say you’re planning to purchase a fixer-upper home for $100,000. The estimated total costs of the project (including the purchase price, renovations, and other associated costs) is $150,000. If a lender is willing to lend you 125,000, that means the LTC is 125k/150k = .833 or 83%.
Loan to Cost vs Loan to Value
It’s important to note the difference between loan to cost (LTC) and loan to value (LTV). Loan to value is a measure of the amount of financing relative to the property value, rather than the total project costs.
Like LTC, lenders generally have guidelines they have to follow regarding LTV. A lower LTV means there is more equity in the property. This is generally better and something a lender will want to see.
An example of LTV
For example, let’s say you’re planning to purchase a fixer-upper home for $100,000. The estimated total costs of the project (including the purchase price, renovations, and other associated costs) is $150,000. The property will be worth $200,000 when it’s finished. If a lender is willing to lend you 150,000, that means the LTV is 150k/200k = .75 or 75.
Main Differences between LTC and LTV
Now that we’ve looked at the loan to cost meaning and explored topics like Loan to Cost vs Loan to Value, let’s take a closer look at the main differences between LTV and LTC.
- As we mentioned earlier, loan to cost looks at the amount of financing relative to the total project costs, while loan to value looks at the amount of financing relative to the property value.
- Another key difference is that LTC is typically used for investment properties, while LTV is more often used for owner-occupied properties.
Why Loan to Cost Is Important for Fix and Flips
If you’re planning to finance a fix and flip project, LTC can be an important consideration. This is because the LTC will impact if you qualify for a hard money loan.
For example, let’s say you’re looking at a fix and flip property that will cost $200,000 to purchase and renovate. If you can only get financing for 70% of the total project costs, that would mean your maximum loan amount would be $140,000.
On the other hand, if you can get financing for 80% of the total project costs, that would mean your maximum loan amount would be $160,000. As you can see, just a small change in LTC can have a big impact on your bottom line.
When you’re considering a fix and flip property, it’s important to think about the loan to cost ratio. This will help you determine how much money you’ll be able to borrow from a lender and what your maximum budget will be.
In Conclusion – Loan to Cost Meaning
We hope this article has helped you better understand loan to cost and why it’s important for fix and flips especially. Remember, the loan to cost ratio is a measure of the amount of financing relative to the total project costs. A higher LTC means there is more debt financing relative to the total cost of the project.
When you’re considering a fix and flip property, it’s important to think about the loan to cost ratio. This will help you determine how much money you’ll be able to borrow from a lender and what your maximum budget will be. Hopefully this article answers all your questions about loan to cost meaning. Thanks for reading!